THE SECRET BAILOUT OF JPMORGAN:
HOW INSIDER TRADING LOOTED BEAR STEARNS AND THE AMERICAN TAXPAYER

The mother of all insider trades was pulled off in 1815,
when London financier Nathan Rothschild led British investors to believe
that the Duke of Wellington had lost to Napoleon at the Battle of Waterloo.
In a matter of hours, British government bond prices plummeted. Rothschild,
who had advance information, then swiftly bought up the entire market in
government bonds, acquiring a dominant holding in England’s debt for pennies
on the pound. Over the course of the nineteenth century, N. M. Rothschild
would become the biggest bank in the world, and the five brothers would come
to control most of the foreign-loan business of Europe. “Let me issue and
control a nation’s money,” Rothschild boasted in 1838, “and I care not who
writes its laws.”

In the United States a century later, John Pierpont
Morgan again used rumor and innuendo to create a panic that would change the
course of history. The panic of 1907 was triggered by rumors that two major
banks were about to become insolvent. Later evidence pointed to the House of
Morgan as the source of the rumors. The public, believing the rumors,
proceeded to make them come true by staging a run on the banks. Morgan then
nobly stepped in to avert the panic by importing $100 million in gold from
his European sources. The public thus became convinced that the country
needed a central banking system to stop future panics, overcoming strong
congressional opposition to any bill allowing the nation’s money to be
issued by a private central bank controlled by Wall Street; and the Federal
Reserve Act was passed in 1913. Morgan created the conditions for the Act’s
passage, but it was Paul Warburg who pulled it off. An immigrant from
Germany, Warburg was a partner of Kuhn, Loeb, the Rothschilds’ main American
banking operation since the Civil War. Elisha Garrison, an agent of Brown
Brothers bankers, wrote in his 1931 book Roosevelt, Wilson and the Federal
Reserve Law that “Paul Warburg is the man who got the Federal Reserve Act
together after the Aldrich Plan aroused such nationwide resentment and
opposition. The mastermind of both plans was Baron Alfred Rothschild of
London.” Morgan, too, is now widely believed to have been Rothschild’s agent
in the United States. 1

Robert Owens, a co-author of the Federal Reserve Act,
later testified before Congress that the banking industry had conspired to
create a series of financial panics in order to rouse the people to demand
“reforms” that served the interests of the financiers. A century later,
JPMorgan Chase & Co. (now one of the two largest banks in the United States)
may have pulled this ruse off again, again changing the course of history.
“Remember Friday March 14, 2008,” wrote Martin Wolf in The Financial Times;
“it was the day the dream of global free-market capitalism died.”

The Rumors that Sank Bear Stearns

Mergers, buyouts and leveraged acquisitions have been the
modus operandi of the Morgan empire ever since John Pierpont Morgan took
over Carnegie’s steel mills to form U.S. Steel in 1901. The elder Morgan is
said to have hated competition, the hallmark of “free-market capitalism.” He
did not compete, he bought; and he bought with money created by his own
bank, using the leveraged system perfected by the Rothschild bankers known
as “fractional reserve” lending. On March 16, 2008, this long tradition of
takeovers and acquisitions culminated in JPMorgan’s buyout of rival
investment bank Bear Stearns with a $55 billion loan from the Federal
Reserve. Although called “federal,” the U.S. central bank is privately owned
by a consortium of banks, and it was set up to protect their interests.2
The secret weekend purchase of Bear Stearns with a Federal Reserve loan was
precipitated by a run on Bear’s stock allegedly triggered by rumors of its
insolvency. An article in The Wall Street Journal on March 15, 2008 cast
JPMorgan as Bear’s “rescuer”:

“The role of rescuer has long been part of J.P.
Morgan’s history. In what’s known as the Panic of 1907, a semi-retired
J. Pierpont Morgan helped stave off a national financial crisis when he
helped to shore up a number of banks that had seen a run on their
deposits.”

That was one interpretation of events, but a later
paragraph was probably closer to the facts:

“J.P. Morgan has been on the prowl for acquisitions.
. . . Bear’s assets could be too good, and too cheap, to turn down.”3

The “rescuer” was not actually JPMorgan but was the
Federal Reserve, the “bankers’ bank” set up by J. Pierpont Morgan to
backstop bank runs; and the party “rescued” was not Bear Stearns, which
wound up being eaten alive. The Federal Reserve (or “Fed”) lent $25 billion
to Bear Stearns and another $30 billion to JPMorgan, a total of $55 billion
that all found its way into JPMorgan’s coffers. It was a very good deal for
JPMorgan and a very bad deal for Bear’s shareholders, who saw their stock
drop from a high of $156 to a low of $2 a share. Thirty percent of the
company’s stock was held by the employees, and another big chunk was held by
the pension funds of teachers and other public servants. The share price was
later raised to $10 a share in response to shareholder outrage and threats
of lawsuits, but it was still a very “hostile” takeover, one in which the
shareholders had no vote.

The deal was also a very bad one for U.S. taxpayers, who
are on the hook for the loan. Although the Fed is privately owned, the money
it lends is taxpayer money, and it is the taxpayers who are taking the risk
that the loan won’t be repaid. The loan for the buyout was backed by Bear
Stearns assets valued at $55 billion; and of this sum, $29 billion was
non-recourse to JPMorgan, meaning that if the assets weren’t worth their
stated valuation, the Fed could not go after JPMorgan for the balance. The
Fed could at best get its money back with interest; and at worst, it could
lose between $25 billion and $40 billion.4 In
other words, JPMorgan got the money ($55 billion) and the taxpayers got the
risk (up to $40 billion), a ruse called the privatization of profit and
socialization of risk. Why did the Fed not just make the $55 billion loan to
Bear Stearns directly? The bank would have been saved, and the Fed and the
taxpayers would have gotten a much better deal, since Bear Stearns could
have been required to guaranty the full loan.

The Highly Suspicious Out-of-the-Money Puts

That was one of many questions raised by John Olagues, an
authority on stock options, in a March 23 article boldly titled “Bear
Stearns Buy-out . . . 100% Fraud.” Olagues maintains that the Bear Stearns
collapse was artificially created to allow JPMorgan to be paid $55 billion
of taxpayer money to cover its own insolvency and acquire its rival Bear
Stearns, while at the same time allowing insiders to take large “short”
positions in Bear Stearns stock and collect massive profits. For evidence,
Olagues points to a very suspicious series of events, which will be detailed
here after some definitions for anyone not familiar with stock options:

A put is an option to sell a stock at an agreed-upon
price, called the strike price or exercise price, at any time up to an
agreed-upon date. The option is priced and bought that day based upon the
current stock price, on the presumption that the stock will decline in
value. If the stock’s price falls below the strike price, the option is “in
the money” and the trader has made a profit. Now here’s the evidence:

On March 10, 2008, Bear Stearns stock dropped to $70 a
share -- a recent low, but not the first time the stock had reached that
level in 2008, having also traded there eight weeks earlier. On or before
March 10, 2008, requests were made to the Options Exchanges to open a new
April series of puts with exercise prices of 20 and 22.5 and a new March
series with an exercise price of 25. The March series had only eight days
left to expiration, meaning the stock would have to drop by an unlikely $45
a share in eight days for the put-buyers to score. It was a very risky bet,
unless the traders knew something the market didn’t; and they evidently
thought they did, because after the series opened on March 11, 2008,
purchases were made of massive volumes of puts controlling millions of
shares.

On or before March 13, 2008, another request was made of
the Options Exchanges to open additional March and April put series with
very low exercise prices, although the March put options would have just five days of trading to expiration. Again the exchanges accommodated the
requests and massive amounts of puts were bought. Olagues contends that
there is only one plausible explanation for “anyone in his right mind to buy
puts with five days of life remaining with strike prices far below the
market price”: the deal must have already been arranged by March 10 or
before.

These facts were in sharp contrast to the story told by
officials who testified at congressional hearings on April 4. All witnesses
agreed that false rumors had undermined confidence in Bear Stearns, making
the company crash despite adequate liquidity just days before. On March 10,
2008, Reuters was citing Bear Stearns sources saying there was no liquidity
crisis and no truth to the speculation of liquidity problems. On March 11,
the Chairman of the Securities and Exchange Commission himself expressed
confidence in its “capital cushion.” Even “mad” TV investment guru Jim
Cramer was proclaiming that all was well and the viewers should hold on. On
March 12, official assurances continued. Olagues writes:

“The fact that the requests were made on March 10 or
earlier that those new series be opened and those requests were
accommodated together with the subsequent massive open positions in
those newly opened series is conclusive proof that there were some who
knew about the collapse in advance . . . . This was no case of a sudden
development on the 13 or 14th, where things changed dramatically making
it such that they needed a bail-out immediately. The collapse was
anticipated and prepared for. . . .

“Apparently it is claimed that some people have the
ability to start false rumors about Bear Stearns’ and other banks’
liquidity, which then starts a ‘run on the bank.’ These rumor mongers
allegedly were able to influence companies like Goldman Sachs to
terminate doing business with Bear Stearns, notwithstanding that Goldman
et al. believed that Bear Stearns balance sheet was in good shape. . . .
The idea that rumors caused a ‘run on the bank’ at Bear Stearns is 100%
ridiculous. Perhaps that’s the reason why every witness was so guarded
and hesitant and looked so mighty strained in answering questions . . .
.

“To prove the case of illegal insider trading, all
the Feds have to do is ask a few questions of the persons who bought
puts on Bear Stearns or shorted stock during the week before March 17,
2008 and before. All the records are easily available. If they bought
puts or shorted stock, just ask them why.”5

Suspicions Mount

Other commentators point to other issues that might be
probed by investigators. Chris Cook, a British consultant and the former
Compliance Director for the International Petroleum Exchange, wrote in an
April 24 blog:

“As a former regulator myself, I would be crawling
all over these trades. . . . One question that occurs to me is who
actually sold these Put Options? And why aren’t they creating merry hell
about the losses? Where is Spitzer when we need him?”6

In an April 23 article in LeMetropoleCafe.com, Rob Kirby
agreed with Olagues that it was not Bear Stearns but JPMorgan that was
bankrupt and needed to be “recapitalized” with massive loans from the
Federal Reserve. Kirby pointed to the huge losses from derivatives (bets on
the future price of assets) carried on JPMorgan’s books:

“. . . J.P. Morgan’s derivatives book is 2-3 times
bigger than Citibank’s – and it was derivatives that caused losses of
more than 30 billion at Citibank . . . . So, it only made common sense
that J.P. Morgan had to be a little more than ‘knee deep’ in the same
stuff that Citibank was – but how do you tell the market that a bank –
any bank – needs to be recapitalized to the tune of 50 - 80 billion?”7

Kirby wrote in an April 30 article:

“According to the NYSE there are only 240 million
shares of Bear outstanding . . . [Yet] 188 million traded on Mar. 14
alone? Doesn’t this strike you as being odd? . . . What percentage of
the firm was owned by insiders that categorically did not sell their
shares? . . . Bear Stearns employees held 30 % of the company’s stock .
. . 30 % of 240 million is 72 million. If you subtract 72 from 240 you
end up with approximately 170 million. Don’t you think it’s a stretch to
believe that 186+ million real shares traded on Friday Mar. 14? Or do
you believe that rank-and-file Bear employees, worried about their jobs,
were pitching their stocks on the Friday before the company collapsed
knowing their company was toast? But that would be insider trading –
wouldn’t it? No bloody wonder the SEC does not want to probe J.P.
Morgan’s ‘rescue’ of Bear Stearns . . .”8

If real shares weren’t trading, someone must have been
engaging in “naked” short selling – selling stock short without first
borrowing the shares or ensuring that the shares could be borrowed. Short
selling, a technique used by investors to try to profit from the falling
price of a stock, involves borrowing a stock from a broker and selling it,
with the understanding that the stock must later be bought back and returned
to the broker. Naked short selling is normally illegal; but in the interest
of “liquid markets,” a truck-sized loophole exists for “market makers”
(those people who match buyers with sellers, set the price, and follow
through with the trade). Even market makers, however, are supposed to cover
within three days by actually coming up with the stock; and where would they
have gotten enough Bear Stearns stock to cover 75% of the company’s
outstanding shares? In any case, naked short selling is illegal if the
intent is to drive down a stock’s share price; and that was certainly the
result here.9

On May 10, 2008, in weekly market commentary on
FinancialSense.com, Jim Puplava observed that naked short selling has become
so pervasive that the number of shares sold “short” far exceeds the shares
actually issued by the underlying companies. Yet regulators are turning a
blind eye, perhaps because the situation has now gotten so far out of hand
that it can’t be corrected without major stock upheaval. He noted that naked
short selling is basically the counterfeiting of stock, and that it has
reached epidemic proportions since the “uptick” rule was revoked last summer
to help the floundering hedge funds. The uptick rule allowed short selling
only if the stock price were going up, preventing a cascade of short sales
that would take the stock price much lower. But that brake on manipulation
has been eliminated by the Securities Exchange Commission (SEC), leaving the
market in unregulated chaos.

Eliot Spitzer has also been eliminated from the scene,
and it may be for similar reasons. Greg Palast suggested in a March 14
article that the “sin” of the former New York governor may have been
something more serious than prostitution. Spitzer made the mistake of
getting in the way of a $200 billion windfall from the Federal Reserve to
the banks, guaranteeing the mortgage-backed junk bonds of the same banking
predators responsible for the subprime debacle. While the Federal Reserve
was trying to bail the banks out, Spitzer was trying to regulate them,
bringing suit on behalf of consumers.10 But he was
swiftly exposed and deposed; and the Treasury has now broached a new plan
that would prevent such disruptions in the future. Like the Panic of 1907
that justified a “bankers’ bank” to prevent future runs, the collapse of
Bear Stearns has been used to justify a proposal giving vast new powers to
the Federal Reserve to promote “financial market stability.” The plan was
unveiled by Treasury Secretary Henry Paulson, former head of Goldman Sachs,
two weeks after Bear Stearns fell. It would “consolidate” the state
regulators (who work for the fifty states) and the SEC (which works for the
U.S. government) under the Federal Reserve (which works for the banks).
Paulson conceded that the result would not be to increase regulation but to
actually take away authority from state regulators and the SEC. All
regulation would be subsumed under the Federal Reserve, the bank-owned
entity set up by J. Pierpont Morgan in 1913 specifically to preserve the
banks’ own interests.

On April 29, a former top Federal Reserve official told
The Wall Street Journal that by offering $30 billion in financing to
JPMorgan for Bear’s assets, the Fed had “eliminated forever the possibility
[that it] could serve as an honest broker.” Vincent Reinhart, formerly the
Fed’s director of monetary affairs and the secretary of its policy-making
panel, said the Fed’s bailout of Bear Stearns would come to be viewed as the
“worst policy mistake in a generation.” He noted that there were other
viable options, such as looking for other suitors or removing some assets
from Bear’s portfolio, which had not been pursued by the Federal Reserve.11

Jim Puplava maintains that naked short selling has now
become so pervasive that if the hedge funds were pressed to come in and
cover their naked short positions, “they would actually trigger another
financial crisis.” The Fed and the SEC may be looking the other way on this
widespread stock counterfeiting scheme because “if they did unravel it,
everything really would unravel.” Evidently “promoting market stability”
means that whistle-blowers and the SEC must be silenced so that a grossly
illegal situation can continue, since the crime is so pervasive that to
expose it and prosecute the criminals would unravel the whole financial
system. As Nathan Rothschild observed in 1838, when the issuance and control
of a nation’s money are in private hands, the laws and the people who make
them become irrelevant.

Ellen Brown, J.D., developed her research skills as an
attorney practicing civil litigation in Los Angeles. In Web of Debt,
her latest book, she turns those skills to an analysis of the Federal
Reserve and "the money trust." She shows how this private cartel has usurped
the power to create money from the people themselves, and how we the people
can get it back. Her eleven books include the bestselling Nature's
Pharmacy, co-authored with Dr. Lynne Walker, which has sold 285,000
copies.